Debt agreements

A serious step

Debt agreements are available to low income earners who cannot
pay everything they owe, but want to avoid going bankrupt. Debt
agreements have serious long term consequences that may affect your
career or your ability to obtain credit in the future.

You should only consider a debt agreement if you have explored
all other options. If you are thinking about getting a debt
agreement make sure you understand exactly what you are agreeing to
and the effect it can have on your ability to obtain credit in the
future.

What is a debt agreement?

A debt agreement is a binding agreement between you and your
creditors and falls under Part IX of the Bankruptcy Act 1966.

Under a Part IX debt agreement, your creditors agree to accept
an amount of money that you can afford to pay, over a set period of
time, to settle your debts.

Once you have paid this money your creditors cannot recover the
rest of the money you owe.

A debt agreement is not a consolidation loan or an informal
arrangement with your creditors. You should seek independent advice
to make sure a debt agreement is the right option for you.

Things to consider before
getting a debt agreement

Make sure you've considered all the options available to you
before getting into a debt agreement.

This may include talking to your creditors to see if they can
give you more time to pay, to negotiate a repayment plan or to see
if they'll accept a smaller payment to settle the debt.

You can contact your creditors directly or you can ask for free
help from a community legal centre or a financial
counsellor. They will talk to you about your options and may
speak to creditors on your behalf, help with budgeting advice or
give you advice about other sources of government assistance.

Video: Unmanageable debt - Compare your options

Effie Zahos from Money Magazine explains the options you have
for dealing with debt. For more information visit the AFSA
website.

How a debt agreement works

If you meet the eligibility criteria, a debt agreement
administrator will help you prepare a debt agreement proposal,
based on what you can afford to repay. The eligibility
criteria are on the Australian Financial Security Authority's
(AFSA) website.

The proposal will be sent to each of your creditors and they can
vote to accept or reject your proposal. If the majority of
creditors accept your proposal then the debt agreement will start
and all creditors will have to accept the terms of the
agreement.

All creditors will receive the same proportion of the amount you
owe. For example, if you propose to repay 90% of all your
outstanding debts over a 5-year period, then all creditors will get
90% of what you owe them.

Important

Proposing a debt agreement is a serious step. It is an act of bankruptcy and if
the debt agreement is not accepted by your creditors they can use
the proposal to apply to the court to make you bankrupt.

What to check before entering a
debt agreement

If you're considering entering into a debt agreement, be wary of
companies who don't carefully assess your individual circumstances.
Here are some others to look at before you sign a debt
agreement:

Check the administrator is registered -
It's important to check that the person you're dealing
with is on the Australian Financial Security Authority's list
ofregistered
debt agreement administrators.

Check the fees of the administrator -
Administrators usually charge fees for their services. The fees can
consist of upfront fees and ongoing fees and these can add to your
total debts.

Debts that can't be covered
by a debt agreement

There are some debts that can't be covered by a Part IX debt
agreement or have special conditions if they are included.

Secured debts

A secured debt is a debt that is tied to an asset. For example,
a home loan is usually secured by a property. If you are unable to
repay a secured debt the lender may take the asset and sell it to
recover the money you owe them.

If the asset is sold and the money is not enough to cover the
debt, the money still owing could be part of a debt agreement.

Joint debts

If you have a debt in joint names and your partner is unable to
repay their share of the debt, the creditor can ask you to repay
the outstanding amount.

In this situation the creditor can receive money as part of the
debt agreement but still has the right to recover the balance of
the debt from any other borrowers.

Debts that continue after a debt agreement has finished

Some debts cannot be paid out by a debt agreement. You will
still be liable for these debts after a debt agreement has
finished:

Debts incurred by fraud

Child support

Fines, penalties or other court-ordered payments

Student HECS or HELP, Student Financial Supplement Scheme
debts

Overseas debts

If you have an overseas debt, the overseas creditor is allowed
to be part of the debt agreement process. Whether you will be
liable for any outstanding balance when the debt agreement has
finished will depend on the laws in the country where you signed
the contract.

The impact of a
debt agreement

Here are some of the things that can be affected if you decide
to enter into a debt agreement:

Your public record - Your name and other
details will be listed on the National Personal
Insolvency Index (NPII) for 5 years from the date of the
agreement or 2 years after the end date, whichever is later. Where
your proposal is withdrawn, not accepted, or lapses, the
information will only appear for a year. The NPII is a public
record managed by the Australian Financial Security Authority
(AFSA).

Your future credit - Your debt agreement will
be listed on your credit report for up to 5 years or
longer in some circumstances.

Telling new creditors - You must tell a new
creditor about the debt agreement when you take on new debt or
obtain goods and services over a certain amount. You can find out
the credit limit on the AFSA website.

Your business - If you have a business and are
trading under another name, your debt agreement must be disclosed
to anyone who deals with your business.

Your career - It may prevent you from
practising certain professions or being employed in certain
positions of trust. If you belong to a regulated profession you
should check the impact of your insolvency with the relevant
professional body.

Possible bankruptcy - Proposing a debt
agreement, whether it is accepted or rejected by your creditors, is
an act of bankruptcy. If you propose a debt agreement
that is not accepted by your creditors, they can use the act of
bankruptcy to apply to the court to make you bankrupt.

Part IX debt agreements are formal agreements
under the Bankruptcy Act and are listed on the public record for a
number of years. Talk to a free and independent financial
counsellor before you take on a debt agreement as there may be
better and cheaper options to manage your debts.